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Economy Nov 20, 2012

Shareholder lessons: Stay away from Ponty Chadha-like businesses

By Arjun Parthasarathy

The mafia like shootout of Ponty Chadda, a prominent businessman with interests in liquor, sugar, films and real estate, indicate the dirty nature of these businesses. All these businesses have political or mafia links or both.

Many listed companies in the stock exchanges are involved in these businesses and unfortunately even if there are clean ones among them, they are subject to the overall involvement of politicians and the underworld. There is no escaping that fact.

In fact, it is surprising that Ponty Chadda was not involved in mining, which is another business that has close involvement of politicians and mafia. Such businesses where the promoter works for himself and his cronies' personal interests are are extremely shareholder unfriendly.

Sugar is a business that has deep political link-up. Agencies

It may sound like a sweeping statement to avoid all businesses that have a stigma attached to them even if they promise high returns on a short-term basis but investors should choose whom to entrust their money.

And business of liquor, sugar, films, real estate and mining are not meant to take care of shareholders' money, they are meant to enrich the wealth of a few at the cost of many.

The liquor business in India in most of the states works on crony capitalism. State governments control liquor distribution either directly (Tamil Nadu) or indirectly (Punjab and Uttar Pradesh).

The business is cash driven as pay-offs are made in black. The shareholder in a listed liquor company will only see part of the profits on the business.

Even if on paper India is a lucrative liquor market with many foreign brands looking to enter the country (Diageo buying into United Spirits is one recent foreign brand consolidation in India), the shareholder still does not fully benefit from the liquor business.

Why would one want to invest in a business where his interests are not given first preference?

Sugar is a business that has deep political link-up. Politicians are involved in the business in many states of the country and sugar price movements affect politicians in terms of votes. The higher the sugar price the more the disgruntlement with the establishment leading to prices being dictated by the government rather than by the market.

The shareholder in a sugar company has to contend with market forces in terms of raw material availability and with government involvement in terms of dictating prices or raw material as well as the end product.

Government policies are for the benefit of the ruling party and not for the shareholders. The film industry's connection with mafia is well documented and it needs no elaboration. Shareholders do not know what they are getting when investing in a film company (production or distribution).

Real estate is another shareholder unfriendly business where involvement of politicians and mafia is high. Black money is rampant in the industry implying that shareholders of real estate companies do not see the full value of the sales on the books of the company.

The shareholder also does not know the details of the land banks of real estate companies in terms of how the land was acquired, what were the pay-offs etc. Transparency is extremely low in the real estate business. In short, extremely disadvantageous for shareholders.

Mining is another sector marred by unholy politician-mafia links. After all, land belongs to the government and any government-owned land is meant for increasing the riches of the politicians and not that of the stakeholders.

Exploitation of people and natural resources is rampant in the sector. Obviously, wherever there is exploitation, there are pay-offs and prices to be fixed, and shareholders will not see the business realising full returns.

Money attracts money and all these businesses mentioned above will continue to attract money, including institutional money. However, that does not mean these businesses will become shareholder friendly. Hence, it is best for small investors to avoid such businesses. India does not lack shareholder friendly businesses and there are plenty of businesses where shareholder interests are placed first. Invest in such companies that protect shareholders interests.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com a website for investors.

by Arjun Parthasarathy

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